OREANDA-NEWS. Several of Taiwan's financial holding companies (FHCs) have altered their business models significantly in the last few years, resulting in changes to group credit profiles and rating actions, says Fitch Ratings in its latest Special Report. These structural changes are often the result of new acquisitions which have resulted in an overall rise in leverage. Fitch believes these trends could continue as FHCs seek to boost growth and profitability through inorganic expansion and a shifting business mix.

Taiwanese financial groups have been facing a protracted, challenging domestic operating environment characterised by weak economic growth and low interest rates. Low growth prospects have particularly prompted those FHCs which had previously been securities-focused - including Yuanta Group and China Development Group - to substantially expand their banking exposure. They have been motivated to enhance long-term competitiveness and shareholder returns by taking advantage of comparably lower capital requirements for commercial banks than for securities firms. Raising their banking exposure also allows these financial groups to gain greater access to a retail customer base.

Fitch believes that growth through acquisition could continue to be a theme in Taiwan should the low-margin operating environment persist. Notably, the FHC's have historically been underpinned by a single key subsidiary that formed the group's flagship business. But this has been changing as some groups add on a new core business, transforming their consolidated profiles in the process.

These kinds of structural transitions can result in a change in Fitch's ratings approach and revisions to the FHC and subsidiary entity ratings. This is especially the case as FHCs are now more likely to have multiple principal operating subsidiaries. In the cases of Yuanta and China Development, evolution of their business models prompted Fitch to assess their credit profiles using a common ratings approach rather than the previously used anchor approach. This reflected the fact that their securities subsidiaries alone could no longer sustain the groups' credit profiles.